Exemption from Registration for Certain Foreign FCMs and IBs
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Federal Register › Vol. 64 › 64 FR 46618
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 30
Exemption from Registration for Certain Foreign FCMs and IBs
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rules.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
proposing to amend the Commission's rules and regulations on Foreign
Futures and Foreign Options Transactions to include new Rules 30.12.\1\
The new rule will permit certain foreign firms acting in the capacity
of FCMs and IBs to accept and execute foreign futures and options
orders directly from certain U.S. customers via telephone, facsimile
and electronic message without having to register with the Commission.
\1\ Commission rules referred to herein are found at 17 CFR Ch.
I (1999).
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DATES: Comments must be received by October 25, 1999.
ADDRESSES: Interested persons should submit their views and comments to
Jean A. Webb, Secretary of the Commission, Commodity Futures Trading
Commission, 1155 21st Street, NW, Washington, DC 20581. In addition,
comments may be sent by facsimile transmission to facsimile number
(202) 418-5521, or by electronic mail to [email protected]. Reference
should be made to ``Commission Rules 30.12.''
FOR FURTHER INFORMATION CONTACT: Laurie Plessala Duperier, Special
Counsel, or Andrew Chapin, Staff Attorney, Division of Trading and
Markets, Commodity Futures Trading Commission, 1155 21st Street, NW,
Washington, DC 20581. Telephone: (202) 418-5430.
SUPPLEMENTARY INFORMATION:
I. Background Information
A. Formal Rulemaking
rotected]. Reference
should be made to ``Commission Rules 30.12.''
FOR FURTHER INFORMATION CONTACT: Laurie Plessala Duperier, Special
Counsel, or Andrew Chapin, Staff Attorney, Division of Trading and
Markets, Commodity Futures Trading Commission, 1155 21st Street, NW,
Washington, DC 20581. Telephone: (202) 418-5430.
SUPPLEMENTARY INFORMATION:
I. Background Information
A. Formal Rulemaking
In 1987, the Commission adopted a new Part 30 to its regulations to
govern the offer and sale to U.S. persons of futures and option
contracts entered into on or subject to the rules of a foreign board of
trade.\2\ These rules were promulgated pursuant to sections 2(a)(1)(A),
4(b) and 4c of the Commodity Exchange Act (``Act''), which vest the
Commission with exclusive jurisdiction over the offer and sale, in the
United States, of options and futures contracts traded on or subject to
the rules of a board of trade, exchange or market located outside of
the United States.
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\2\ 52 FR 28980 (August 5, 1987).
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Part 30 sets forth regulations governing foreign futures \3\ and
foreign option \4\ transactions executed on behalf of foreign futures
or foreign options customers.\5\ For example, Rule 30.4 requires any
person engaged in the activities of a futures commission merchant
(``FCM''), introducing broker (``IB''), commodity pool operator
(``CPO'') and commodity trading advisor (``CTA''), as those activities
are defined within the rule, to register with the Commission unless
such person claims relief from registration under Part 30
or foreign options customers.\5\ For example, Rule 30.4 requires any
person engaged in the activities of a futures commission merchant
(``FCM''), introducing broker (``IB''), commodity pool operator
(``CPO'') and commodity trading advisor (``CTA''), as those activities
are defined within the rule, to register with the Commission unless
such person claims relief from registration under Part 30. The
transactions which are subject to regulation and require registration
under Part 30 include the solicitation or acceptance of orders for
trading any foreign futures or foreign option contract and acceptance
of money, securities or property to margin, guarantee or secure any
foreign futures or foreign option trades or contracts.\6\
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\3\ ``Foreign futures'' as defined in Part 30 means ``any
contract for the purchase or sale of any commodity for future
delivery made, or to be made, on or subject to the rules of any
foreign board of trade.'' Commission rule 30.1(a).
\4\ ``Foreign option'' as defined in Part 30 means ``any
transaction or agreement which is or is held out to be of the
character of, or is commonly known to the trade as, an `option',
`privilege', `indemnity', `bid', `offer', `put', `call', `advance
guaranty', or `decline guaranty', made or to be made on or subject
to the rules of any foreign board of trade,'' Commission Rule
30.1(b).
\5\ Pursuant to Commission Rule 30.1(c), ``Foreign futures or
foreign options customer'' means ``any person located in the United
States, its territories or possessions who trades in foreign futures
or foreign options: Provided, That an owner or holder of a
proprietary account as defined in paragraph (y) of Sec. 1.3 of this
chapter shall not be deemed to be a foreign futures or foreign
options customer within the meaning of Secs. 30.6 and 30.7 of this
part.''
\6\ See Commission rule 30.4.
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ades in foreign futures
or foreign options: Provided, That an owner or holder of a
proprietary account as defined in paragraph (y) of Sec. 1.3 of this
chapter shall not be deemed to be a foreign futures or foreign
options customer within the meaning of Secs. 30.6 and 30.7 of this
part.''
\6\ See Commission rule 30.4.
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Under Part 30, certain persons located outside the United States
may obtain an exemption from registration and certain other
requirements. For example, under Rule 30.10 and Appendix A thereto, the
Commission may exempt a foreign firm that solicits or accepts orders
(and accepts money, securities or property to margin the trades made
thereto) from U.S. foreign futures and options customers from
compliance with certain Commission rules, including those rules
pertaining to registration, provided that a comparable regulatory
system exists in the firm's home country and that certain safeguards
are in place to protect U.S. investors, including an information-
sharing arrangement between the Commission and the firm's home country
regulator.\7\ In addition, under
Rule 30.5, the Commission may exempt foreign persons acting in the
capacity of an IB, CPO or CTA from registration, provided that the
person complies with certain requirements.\8\
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investors, including an information-
sharing arrangement between the Commission and the firm's home country
regulator.\7\ In addition, under
Rule 30.5, the Commission may exempt foreign persons acting in the
capacity of an IB, CPO or CTA from registration, provided that the
person complies with certain requirements.\8\
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\7\ See Appendix A to Part 30; 62 FR 47792 (September 11, 1997)
(``Delegation Order''). Note that persons located inside the United
States may petition for an exemption under Rule 30.10 separate from
the comparability relief provided for in Appendix A.
\8\ An exemption from registration pursuant to Rule 30.5
requires a foreign person acting in the capacity of an IB, CPO or
CTA to file a petition for exemption with NFA and to designate an
agent for service of process. As set forth in the most recent
amendments to Rule 30.5, 64 FR 28910 (May 28, 1999), the Rule 30.5
applicant must (1) provide general background information and
information regarding the firm's fitness to conduct business with
U.S. customers, (2) irrevocably agree to the jurisdiction of the
commission and state and federal courts in the United States with
respect to activities and transactions subject to Part 30, and (3)
designate an agent for service of process. The agent for service of
process must be a registered FCM, a registered futures association,
or any other person located in the United States in the business of
providing agency services. In addition, Rule 30.5 requires that only
a U.S. FCM or a foreign broker who has received confirmation of Rule
30.10 relief, infra note 15, may carry accounts for or on behalf of
any foreign futures or foreign options customer.
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B. Interpretation of the Registration Requirement of Rule 30.4
f
providing agency services. In addition, Rule 30.5 requires that only
a U.S. FCM or a foreign broker who has received confirmation of Rule
30.10 relief, infra note 15, may carry accounts for or on behalf of
any foreign futures or foreign options customer.
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B. Interpretation of the Registration Requirement of Rule 30.4
The Division of Trading and Markets (``Division'') has issued
advisories and interpretative letters that more specifically define the
scope of permissible activity under Part 30 and what activities by
foreign futures and options brokers (``FFOBs'')\9\ trigger the
Commission registration requirement under Rule 30.4(a). In 1987, the
Division issued an interpretative letter regarding registration by an
FFOB that carries an FCM's customer omnibus account. The Division
indicated that certain unregistered FFOBs would not be required to
register pursuant to Rule 30.4 if their activities on a foreign
exchange on behalf of U.S. foreign futures and options customers were
limited solely to carrying foreign futures and options accounts on an
omnibus basis on behalf of an FCM and to performing the services
incidental thereto.\10\ The Division reasoned that registration should
not be required in that circumstance because of the presence of an
``intervening U.S. registrant, i.e., a U.S. FCM, to whom the rules
would be fully applicable.'' \11\ The Division, however, limited this
relief to the members of a foreign exchange and/or the affiliates of an
FCM.\12\
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reasoned that registration should
not be required in that circumstance because of the presence of an
``intervening U.S. registrant, i.e., a U.S. FCM, to whom the rules
would be fully applicable.'' \11\ The Division, however, limited this
relief to the members of a foreign exchange and/or the affiliates of an
FCM.\12\
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\9\ For this preamble and the proposed rule, ``foreign futures
and options broker'' will mean any person located outside the United
States or its territories that is a member of a foreign board of
trade, as defined in Sec. 1.3(ss) of the Act, and is licensed,
authorized or otherwise subject to regulation of a foreign
jurisdiction. This term has not been previously defined in any of
the Advisories. In another proposed rulemaking issued on this date,
the term ``foreign futures and options broker'' will be similarly
defined in proposed amendments to Rule 30.1. The Commission believes
that a formal definition of ``foreign futures and options broker''
is necessary to distinguish it from the definition of ``foreign
broker'' for purposes of Parts 15 through 21 of the Act. Commission
Rule 15.00(a)(1) (``foreign broker'' means ``any person located
outside the United States or its territories who carries an account
in commodity futures or commodity options on any contract market for
any other person'').
\10\ CFTC Letter No. 87-7, Comm. Fut. L. Rep. (CCH) para.23,792
(November 17, 1987).
\11\ Id. at 34,408.
\12\ Id. at 34,407-408. An affiliate of an FCM who is not also a
member of the relevant foreign exchange must be licensed, authorized
or otherwise subject to regulation in accordance with the relevant
laws, rules or regulations of that foreign jurisdiction
arket for
any other person'').
\10\ CFTC Letter No. 87-7, Comm. Fut. L. Rep. (CCH) para.23,792
(November 17, 1987).
\11\ Id. at 34,408.
\12\ Id. at 34,407-408. An affiliate of an FCM who is not also a
member of the relevant foreign exchange must be licensed, authorized
or otherwise subject to regulation in accordance with the relevant
laws, rules or regulations of that foreign jurisdiction. In
addition, the foreign affiliate must identify to the Commission and
the National Futures Association the foreign clearing member through
which the affiliate conducts business and agree to respond to
requests for information and records concerning transactions on such
foreign exchange. Id. at 34,408.
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In 1993, the Division issued an advisory permitting certain foreign
affiliates of a U.S. FCM not registered with the Commission that carry
the customer omnibus account of the FCM to receive orders for trades
placed directly by certain foreign futures and options customers for
execution for or on behalf of such customers through the FCM's customer
omnibus account.\13\ The Division reasoned that the regulatory purposes
of the Act would not be adversely affected if direct contacts between
certain institutional customers and certain affiliates of an FCM were
permitted under circumstances where the FCM could adequately control
the transactions for which its omnibus account would be obligated by
such direct customer contacts.\14\ Accordingly, the Division
interpreted Rule 30.4 to exempt from registration those foreign
affiliates \15\ that have received confirmation of Rule 30.10 relief
\16\ who receive orders directly from ``authorized customers'' \17\ for
or on behalf of such customers through the FCM's customer omnibus
account.\18\ This relief, however, was contingent upon the FCM's
compliance with certain conditions
cordingly, the Division
interpreted Rule 30.4 to exempt from registration those foreign
affiliates \15\ that have received confirmation of Rule 30.10 relief
\16\ who receive orders directly from ``authorized customers'' \17\ for
or on behalf of such customers through the FCM's customer omnibus
account.\18\ This relief, however, was contingent upon the FCM's
compliance with certain conditions. As outlined in the Advisory, an FCM
was required to institute certain procedures with regard to its ability
to adequately supervise the impact of such requests on its financial
condition, confirm and supervise foreign futures and options orders
placed through its customer omnibus account, and maintain an audit
trail to track an order from the time it is placed to the time it is
cleared and reported back to the foreign futures and options
customer.\19\ With these procedures in place, unregistered foreign
affiliates of a U.S. FCM that had received confirmation of Rule 30.10
relief were permitted to accept directly orders from certain
institutional investors for trades to be placed in the FCM's customer
omnibus account,\20\ and the Commission would have access to all the
pertinent financial information should a problem arise.
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\13\ CFTC Advisory No. 93-115, Comm. Fut. L. Rep. (CCH) para.
25,932 at 41,047 (December 23, 1993).
\14\ Id. at 41,052.
\15\ The unregistered FFOB must either have a parent/subsidiary
relationship with an FCM or otherwise be affiliated through common
ownership. Id. at 41,054.
\16\ Rule 30.10 and Appendix A thereto allows the Commission to
exempt a foreign firm that solicits or accepts orders (and accepts
money, securities or property to margin the trades made thereto)
from U.S
23, 1993).
\14\ Id. at 41,052.
\15\ The unregistered FFOB must either have a parent/subsidiary
relationship with an FCM or otherwise be affiliated through common
ownership. Id. at 41,054.
\16\ Rule 30.10 and Appendix A thereto allows the Commission to
exempt a foreign firm that solicits or accepts orders (and accepts
money, securities or property to margin the trades made thereto)
from U.S. foreign futures and options customers engaging in those
acts described by Rule 30.4(a) from compliance with certain
Commission rules and regulations based upon the firm's compliance
with comparable regulatory requirements imposed by the firm's home-
country regulator. The Commission has established a process whereby
a foreign regulator or self-regulatory organization (``SRO'') can
petition on behalf of its regulatees or members, respectively, for
such an exemption based upon the comparability of the regulatory
structure in the foreign jurisdiction to that under the Act. Once
the Commission determines that the foreign jurisdiction's regulatory
structure offers comparable regulatory oversight, the Commission
issues an Order granting general relief subject to certain
conditions. Firms seeking confirmation of relief must make certain
representations set forth in the Rule 30.10 Order issued to the
regulator or SRO from the firm's home country. For a more detailed
discussion of the Commission's comparability analysis and the
representations to be made by foreign regulators and individual
foreign firms, see FR 47792, 47793 (September 11, 1997).
\17\ For the purpose of CFTC Advisory No. 93-115, ``authorized
customers'' meant:
epresentations set forth in the Rule 30.10 Order issued to the
regulator or SRO from the firm's home country. For a more detailed
discussion of the Commission's comparability analysis and the
representations to be made by foreign regulators and individual
foreign firms, see FR 47792, 47793 (September 11, 1997).
\17\ For the purpose of CFTC Advisory No. 93-115, ``authorized
customers'' meant:
(i) An FCM, IB, CPO or CTA registered as such with the
Commission;
(ii) A broker or dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934;
(iii) An investment company registered under the Investment
Company Act of 1940 or a business development company defined in
section 2(a)(48) of the Act;
(iv) An insurance company as defined in section 2(13) of the
Securities Act;
(vi) A plan established by and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state
or its political subdivisions, for the benefit of its employees, if
such plan has total assets in excess of $5,000,000;
(vii) An employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974, provided that the
investment decision is made by a plan fiduciary, as defined in
section 3(21) of the Act, which is a bank, savings and loan
association, insurance company, or registered adviser, or that the
employee benefit plan has total assets in excess of $5,000,000;
(viii) A private business development company as defined in
section 202(a)(22) of the Investment Advisers Act of 1940;
(ix) An organization described in section 501(c)(3) of the
Internal Revenue Code, with total assets in excess of $5,000,000;
k, savings and loan
association, insurance company, or registered adviser, or that the
employee benefit plan has total assets in excess of $5,000,000;
(viii) A private business development company as defined in
section 202(a)(22) of the Investment Advisers Act of 1940;
(ix) An organization described in section 501(c)(3) of the
Internal Revenue Code, with total assets in excess of $5,000,000;
(x) A corporation, Massachusetts or similar business trust, or
partnership, other than a pool which has total assets in excess of
$5,000,000;
(xi) A natural person who individually or with that person's
spouse owns a portfolio of securities and other property with an
aggregate market value of at least $5,000,000;
(xii) A pool, trust, insurance company separate account or bank
collective trust, with total assets in excess of $5,000,000;
(xiii) A foreign person substantially equivalent to those
persons described in paragraph (i) through (xii) above; or
(xiv) A governmental entity (including the United States, a
state, or foreign government) or political subdivision thereof, or a
multinational or supranational entity or an instrumentality, agency
or department of any of the foregoing.
Id. at 41,052-053.
\18\ Id. at 41,052-054.
\19\ Id.
\20\ The relief extended to certain unregistered FFOBs in
Advisory No. 93-115 was limited to an FCM's institutional customer's
ability to place orders directly with the FCM's Rule 30.10 qualified
foreign affiliate which carried that FCM's customer omnibus account.
If that foreign affiliate in turn had an omnibus account with yet
another affiliated firm (or firms) with Rule 30.10 relief, the FCM's
institutional customer was not permitted to use procedure described
therein to place orders with other foreign affiliate of the FCM
unless the trade processing and recordkeeping systems of the FCM and
relevant affiliates were linked in a manner which would have
permitted the FCM and relevant foreign affiliates to remain in
compliance with the terms of the Advisory. Id
30.10 relief, the FCM's
institutional customer was not permitted to use procedure described
therein to place orders with other foreign affiliate of the FCM
unless the trade processing and recordkeeping systems of the FCM and
relevant affiliates were linked in a manner which would have
permitted the FCM and relevant foreign affiliates to remain in
compliance with the terms of the Advisory. Id. at 41,051.
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In 1995, the Division issued another advisory expanding the bounds
of permissible direct order transmittal to include contact between
certain foreign futures and options customers and foreign affiliates of
U.S. FCMs that were not registered and had not received confirmation of
Rule 30.10 relief.\21\ Subject to additional terms and conditions, the
Division determined that the regulatory purposes of the Act would not
be undermined by allowing these unregistered affiliates of FCMs to
accept orders directly from ``authorized customers'' for execution for
or on behalf of such customers through the FCM's customer omnibus
account.\22\ Similar to the terms and conditions described in Advisory
No. 93-115, the relief in Advisory No. 95-08 was contingent upon the
satisfaction of certain conditions by the FCM. In particular, an FCM
was required to ensure that customers authorized to transmit orders
directly to its foreign affiliate only deal with ``designated
persons,'' i.e., a class of individuals working in the office of the
foreign affiliate identified by and under the direct supervision of the
FCM,\23\ (2) that any ``designated person'' who accepted or entered
orders in other than a clerical capacity be registered with the
Commission as an AP, and (3) that all ``designated persons'' at the
foreign affiliate were subject to the supervision of an AP of the
FCM.\24\ The FCM was also required to represent to the Commission that
it was liable for all acts by the foreign affiliate through its
``designated person'' whether o
son'' who accepted or entered
orders in other than a clerical capacity be registered with the
Commission as an AP, and (3) that all ``designated persons'' at the
foreign affiliate were subject to the supervision of an AP of the
FCM.\24\ The FCM was also required to represent to the Commission that
it was liable for all acts by the foreign affiliate through its
``designated person'' whether or not the ``designated person'' is
registered with the Commission, or any person who acts in such capacity
whether or not designated, for or on behalf of customers of the FCM
under the circumstances described within the Advisory.\25\ In addition,
both the FCM, and the unregistered FFOB had to undertake to provide
access to original books and records upon the request of the
Commission, and represent that neither was aware of any law of the
relevant foreign jurisdiction that would prohibit either entity from
complying with this undertaking.\26\ Moreover, a qualified,
unregistered FFOC was required to consent to service of process in the
United States with respect to its activities which are the subject of
the Advisory.\27\
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\21\ CFTC Advisory No. 95-08, Comm. Fut. L. Rep. (CCH) para.
26,300 at 42,489 (January 25, 1995). In Advisory No. 95-08, the
Division did not modify the list of ``authorized customers.''
\22\ Id. at 42,490.
\23\ Id. at 42,490-491; see CFTC Letter No. 92-11, Comm. Fut. L.
Rep. (CCH) para. 25,325 at 39,051 (June 25, 1992), as modified by
CFTC Letter No. 93-83, Comm. L. Rep. (CCH) para. 25,949 at 41,089
(August 9, 1993) (discussing procedures necessary for an FCM to
allow a foreign affiliate to handle Globex orders placed by a
customer after normal business hours in the United States, a.k.a.,
``passing the book'').
\24\ Id. 42,490-491.
\25\ Id. at 42,490.
\26\ Id. at 42, 491.
Shortly after it issued CFTC Letter No
ified by
CFTC Letter No. 93-83, Comm. L. Rep. (CCH) para. 25,949 at 41,089
(August 9, 1993) (discussing procedures necessary for an FCM to
allow a foreign affiliate to handle Globex orders placed by a
customer after normal business hours in the United States, a.k.a.,
``passing the book'').
\24\ Id. 42,490-491.
\25\ Id. at 42,490.
\26\ Id. at 42, 491.
Shortly after it issued CFTC Letter No. 95-08, the Division
learned that local laws in both Japan and Hong Kong prevented firms
located in those jurisdictions from removing original books and
records from the country without prior notice to and consent from
the appropriate regulatory agencies. See CFTC Letter No. 95-83,
Comm. Fut. L. Rep. (CCH) para. 26,559 at 43, 490 (September 20,
1995). Accordingly, the Division issued a no-action position with
regards to a U.S. FCM's Japanese and Hong Kong affiliates without
Rule 30.10 relief, provided that the U.S. FCM making the request and
affiliates agreed to provide authentic copies of the original books
and records upon the request of the Commission. Id. at 43,491.
Citing CFTC Letter No. 95-08, the Commission extended this avenue of
relief to all U.S. FCMs with Japanese and Hong Kong affiliates.
Delegation Order, 62 FR at 47795, n.31.
\27\ CFTC Letter No. 95-05, para. 26,300 at 42,491.
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In the aggregate, the interpretative letter and advisories issued
by the Division regarding Rule 30.4 have restricted the foreign order
transmittal process to ``authorized customers'' of U.S. FCMs contacting
the FCM's foreign affiliates. Recently, the Futures Industry
Association (``FIA'') has approached the Commission about a new rule
regarding foreign order transmittal that would expand the relief from
registration pursuant to Rule 30.4 to certain qualified, nonaffiliated
FFOBs.\28\ The rule proposed by FIA would not only allow unregistered,
non-Rule 30.10 FFOBs to accept orders directly from U.S
e FCM's foreign affiliates. Recently, the Futures Industry
Association (``FIA'') has approached the Commission about a new rule
regarding foreign order transmittal that would expand the relief from
registration pursuant to Rule 30.4 to certain qualified, nonaffiliated
FFOBs.\28\ The rule proposed by FIA would not only allow unregistered,
non-Rule 30.10 FFOBs to accept orders directly from U.S. customers for
execution for or on behalf of such customers through the FCM customer
omnibus account carried by the FFOB, but also permit unregistered, non-
Rule 30.10 FFOBs to accept directly and execute these orders for the
purpose of giving the trades up to another unregistered FFOB carrying
the FCM's customer omnibus account.\29\ FIA's proposed rule
significantly expands the relief permitted by the existing
interpretative letter and advisories issued by the Division.
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\28\ Letter from Ronald H. Filler, President, FIA's Law and
Compliance Division, to the Division of Trading and Markets, dated
February 18, 1999. The FIA proposal did not restrict FCM
participation to those firms that met certain minimum capital
requirements, nor did it limit the category of foreign brokers to
those that were clearing members of foreign exchange. The Commission
believes that these limitations are essential and as discussed
below, has incorporated those provisions into the proposed rule.
\29\ Id. at Appendix A, p. 4 (``Example 4. Transaction Executed
by Executing Firm and Given-Up to Firm Carrying US FCM Customer
Omnibus Account'').
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margining of funds. FIA has noted that such an
arrangement also affords the FCM a more complete picture of aggregate
risk that the customer, and hence the FCM, is incurring.\34\
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\30\ Id. at 4.
\31\ Id. at 2.
\32\ Id. at 3.
\33\ Id.
\34\ Id.
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The Commission has determined to propose Rule 30.12 to address the
concerns raised by FIA, and invites public comment on all aspects of
the proposed rule. The Commission believes that the proposed rule would
provide for a significant liberalization of existing rules and
interpretative statements.
II. Proposed Rule 30.12
As the Commission noted in its adoption of Part 30, ``the
implementation of a regulatory scheme such as this is an evolving
process, particularly as the issues are numerous and complex.'' \35\
The Commission believes that it is appropriate to amend provisions of
Part 30 at this time to continue the Commission's efforts to update and
to modernize its regulations. This effort is particularly appropriate
now, when many futures and options exchanges are accessible 24 hours
per day and customers, particularly sophisticated customers, want
prompt access to exchanges globally.
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\35\ 52 FR at 28980.
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gulations. This effort is particularly appropriate
now, when many futures and options exchanges are accessible 24 hours
per day and customers, particularly sophisticated customers, want
prompt access to exchanges globally.
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\35\ 52 FR at 28980.
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Specifically, the Commission proposes to allow certain foreign
firms with sufficient capital and regulatory oversight to directly
receive foreign futures and options orders from certain sophisticated
U.S. customers without having to register with the Commission,
regardless of whether such firm has received confirmation of Rule 30.10
relief or is an affiliate of a U.S. FCM, or whether such firm carries
the FCM's customer omnibus account.\36\ Further, a qualified customer
of an FCM may, with the consent of the FCM,\37\ directly place a
foreign futures and/or options order with an unregistered FFOB who
either carries the FCM's customer omnibus account, or transfers the
trade pursuant to a give-up arrangement to the unregistered FFOB that
carries the FCM's customer omnibus account, without requiring either
FFOB to register or obtain a Rule 30.10 exemption. Such a rule will
permit qualified U.S. investors to select execution and clearing firms
based upon their analysis of the respective services that each firm
provides. Under the proposed rule, a qualified investor would be able
to execute foreign futures and options trades through unregistered
FFOBs without having to sacrifice the operational and economic
efficiencies offered by a single U.S. global clearing firm, such as
centralized recordkeeping, trade reconciliation, and the margining of
funds.
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sed rule, a qualified investor would be able
to execute foreign futures and options trades through unregistered
FFOBs without having to sacrifice the operational and economic
efficiencies offered by a single U.S. global clearing firm, such as
centralized recordkeeping, trade reconciliation, and the margining of
funds.
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\36\ For the purpose of this proposed rulekmaking, ``customer
omnibus account'' means an account in which the transactions of one
or more customers are combined and carried in the name of the
originating FCM rather than separately.
\37\ Since ultimate responsibility for trades executed through
the customer omnibus account lies with the FCM, the customer must
receive approval from the FCM before engaging in direct foreign
order transmittal.
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In proposing Rule 30.12, the Commission has also sought to protect
customers and to minimize systemic risk. Both of these concerns were
implicated in the recent failure of Griffin Trading Company
(``Griffin''), which is instructive here. Late last year, a London
customer of Griffin placed orders on Eurex Deutschland, a German
electronic futures and options exchange, through an executing broker in
London with instructions to give up the trades to the clearing firm
with which Griffin maintained a customer omnibus account. The
customer's orders executed by the executing broker for give-up to
Griffin's customer omnibus account far exceeded the customer's ability
to pay and exceeded the amount of funds on margin in the customer's
account. While Griffin itself presumably would not have executed the
customer's voluminous orders, the unaffiliated executing broker did.
Since neither the customer nor Griffin was able to meet the margin
calls issued by the broker carrying Griffin's customer omnibus account,
Griffin defaulted and ultimately became insolvent
to pay and exceeded the amount of funds on margin in the customer's
account. While Griffin itself presumably would not have executed the
customer's voluminous orders, the unaffiliated executing broker did.
Since neither the customer nor Griffin was able to meet the margin
calls issued by the broker carrying Griffin's customer omnibus account,
Griffin defaulted and ultimately became insolvent.
It would be impossible to fashion regulations that would adequately
protect against every rogue customer placing trades in excess of his
financial resources; nor can the Commission guarantee that no broker
will ever fail. Rather, the Commission must strike a reasonable balance
between permitting and encouraging market efficiency and growth, and
protecting against known risks, particularly those that have systemic
implications. Accordingly, the Commission proposes to permit direct
order transmittal to unregistered FFOBs only if the primary
participants in direct foreign order transmittal (e.g., the customer,
the U.S. FCM and the FFOB) posses the sophistication and the financial
resources to mitigate the risk that any default or failure by an
individual customer or firm will threaten the integrity of the market
itself or cause other customers to lose their money. Had Griffin, the
executing broker and the London customer been required to follow the
proposed rules, the customer could not have lawfully placed the trades
that resulted in Griffin's collapse because all of the rule's
eligibility requirements would not have been met.
Under the proposed rule, an FFOB that is not registered with the
Commission and has not received confirmation of Rule 30.10 relief will
be permitted to receive orders directly from certain U.S. customers for
execution on a foreign exchange only under the circumstances described
below. The exemption from registration for qualified, unregistered
FFOBs does not apply to the solicitation of U.S. foreign futures and
options customers
is not registered with the
Commission and has not received confirmation of Rule 30.10 relief will
be permitted to receive orders directly from certain U.S. customers for
execution on a foreign exchange only under the circumstances described
below. The exemption from registration for qualified, unregistered
FFOBs does not apply to the solicitation of U.S. foreign futures and
options customers. Under the proposed rule, the qualified customer, or
the U.S. FCM acting on its behalf, must initiate contact with the FFOB
in an effort to establish a transactional relationship with consent of
the U.S. FCM that carries its account. Once the transactional
relationship is established, the FFOB may then provide services
incidental to that relationship, including the provision of up-to-date
market information to the customer and the confirmation of any trades
placed by the customer directly with the FFOB. At no time may the
qualified FFOB solicit current or prospective foreign futures and
options customers, direct the trading in any authorized foreign futures
and options customer account, or engage in any other activity that
would require registration under the Act without an appropriate
exemption.
A. Eligible Participants
(1) Authorized Customers
The Commission proposes to limit direct foreign order transmittal
to only the most sophisticated of U.S. investors. In the past, the
Commission has identified particular groups of investors who do not
require the full customer sales practice protections afforded by the
Act.\38\ The Commission believes that the risks inherent in the
procedures permitted by the proposed rule require a distinct, more
narrowly-defined class
mit direct foreign order transmittal
to only the most sophisticated of U.S. investors. In the past, the
Commission has identified particular groups of investors who do not
require the full customer sales practice protections afforded by the
Act.\38\ The Commission believes that the risks inherent in the
procedures permitted by the proposed rule require a distinct, more
narrowly-defined class
of sophisticated investors, called ``authorized customers'' for the
purpose of this rule. Proposed Rule 30.12 will allow authorized
customers to enter into transactions with parties that may or may not
be (1) subject to the jurisdiction of the courts of the United States
or the Commission's reparations or arbitration program, nor (2)
supervised or controlled by a U.S. FCM. As a result, the transactions
may implicate laws, rules, regulations, customs and/or usages that
offer different or diminished protection from those that govern
transactions on U.S. exchanges. Accordingly, the Commission seeks to
identify those sophisticated investors who it reasonably believes will
appreciate the additional risk associated with transmitting orders to
foreign brokers not registered or supervised by the Commission and who
are sufficiently well-capitalized to withstand the risk of such
transactions. Note that, unlike the exemption granted to eligible swap
participants pursuant to Part 35, proposed Rule 30.12 would focus on
the financial sophistication of the person managing the assets and not
the individual contributors to a commodity pool or the clients of a
CTA.
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lized to withstand the risk of such
transactions. Note that, unlike the exemption granted to eligible swap
participants pursuant to Part 35, proposed Rule 30.12 would focus on
the financial sophistication of the person managing the assets and not
the individual contributors to a commodity pool or the clients of a
CTA.
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\38\ For example, in part 4 of the Commission's rules, the
Commission defined certain investors to be ``qualified eligible
participants'' (``QEPs'') and ``qualified eligible clients''
(``QECs'') for the purpose of allowing CPOs and CTAs, respectively,
to avoid certain registration, disclosure, recordkeeping and
reporting obligations with respect to activities undertaken in
connection with these sophisticated persons. Working with the
definition of an ``accredited investor,'' as defined by Regulation D
of the Securities Act, 17 C.F.R. 230.501-230.508, the Commission
defined QEP and QEC status by means of ``objective criteria that
such persons possess either the investment expertise and experience
necessary to understand the risks involved, as evidenced by the
registered status of certain investment professionals, or have an
investment portfolio of a size sufficient to indicate that the
participant has substantial investment experience and thus a high
degree of sophistication with regard to investments as well as
financial resources to withstand the risk of their investments.'' 57
FR 3148, 3151 (January 28, 1992) (proposed Rule 4.7); 57 FR 34853,
34854 (August 7, 1992) (final Rule 4.7).
Similarly, the Commission adopted Parts 35 and 36 to allow
certain sophisticated investors to engage in swaps and contract
market transactions, respectively, in the absence of any Commission
oversight
ents as well as
financial resources to withstand the risk of their investments.'' 57
FR 3148, 3151 (January 28, 1992) (proposed Rule 4.7); 57 FR 34853,
34854 (August 7, 1992) (final Rule 4.7).
Similarly, the Commission adopted Parts 35 and 36 to allow
certain sophisticated investors to engage in swaps and contract
market transactions, respectively, in the absence of any Commission
oversight. For the purpose of defining ``eligible swap participant''
for Part 35, the Commission generally used the list of ``appropriate
persons'' set forth in new section 4(c)(3)(A) through (J) of the Act
and utilized the authority granted by section 4(c)(3)(K) to include
other persons. 58 FR 5587, 5589 (January 22, 1993). For the purpose
of defining ``eligible participant'' for Part 36, the Commission
created a class of sophisticated persons derived from the list of
``appropriate persons'' and the definition of ``eligible swap
participant.'' 60 FR 51323, 51328 (October 2, 1995).
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The Commission believes that financial institutions have the
sophistication to manage and appreciate the risk of such transactions.
These institutions include banks, savings associations, credit unions,
insurance companies, investment companies subject to the regulation
under the Investment Company Act of 1940, broker-dealers subject to
regulation under the Securities Exchange Act of 1934, and FCMs.
Moreover, these institutions are subject to ongoing regulation
regarding, among other things, their financial condition.
Similarly, futures industry professionals, such as CPOs and CTAs,
generally obtain professional licenses by passing proficiency exams
which cover, among other things, the risks associated with commodity
markets. However, their proficiency may not necessarily include an
understanding of the risks of dealing in foreign futures and options
egarding, among other things, their financial condition.
Similarly, futures industry professionals, such as CPOs and CTAs,
generally obtain professional licenses by passing proficiency exams
which cover, among other things, the risks associated with commodity
markets. However, their proficiency may not necessarily include an
understanding of the risks of dealing in foreign futures and options.
As a proxy for such understanding, the Commission proposes to require
foreign brokers seeking relief under proposed Rule 30.12 to only accept
orders from CPOs and CTAs that ``have an investment portfolio of a size
sufficient to indicate that the participant has substantial investment
experience and thus a high degree of sophistication with regard to
investments as well as financial resources to withstand the risk of
their investments.'' \39\ In a like manner, business associations
(including, but not limited to, corporations, proprietorships and
partnerships) may not possess the financial acumen to appreciate
adequately the risks of direct foreign order transmittal, and
therefore, should also be required to maintain a significant asset
level as a proxy for their financial sophistication. However, since
business associations are putting their own funds at risk, and not the
funds of a third party investor, the Commission proposes to require a
lower level of net assets to serve as a proxy for financial
sophistication. Accordingly, the Commission proposes to define
authorized customer to include those CPOs and CTAs with $50,000,000 in
funds under management, and those business associations with
$10,000,000 in net assets, as well.
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\39\ See, e.g., 57 FR 3148, 3151.
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dingly, the Commission proposes to define
authorized customer to include those CPOs and CTAs with $50,000,000 in
funds under management, and those business associations with
$10,000,000 in net assets, as well.
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\39\ See, e.g., 57 FR 3148, 3151.
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In addition, the Commission proposes not to include customer floor
brokers\40\ and floor traders in the definition of authorized
customers.\41\ U.S. floor brokers and floor traders may be well=versed
in the risks of trading on U.S. futures exchanges, but are not required
to be experts in trading foreign futures and options. For similar
reasons, the Commission proposes not to include in the definition of
``authorized customer'' employee benefit plans and state and local
government entities. It is important to note that, despite their
exclusion from the list of authorized customers, small CPOs and CTAs,
as well as state and local government entities and employee benefit
plans, may continue to place orders for foreign futures and options
through a U.S. FCM or a Rule 30.10 firm, in accordance with Part 30 of
the regulations.
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\40\ ``Floor Broker'' means ``any person who, in or surrounding
any pit, ring, post, or other place provided by a contract market
for the meeting of persons similarly engaged, shall purchase or sell
for any other person any commodity for future delivery on or subject
to the rules of any contract market.'' Section 1a(8) of the Act.
\41\ ``Floor Trader'' means ``any person who, in or surrounding
any pit, ring, post, or other place provided by a contract market
for the meeting of persons similarly engaged, purchases, or sells
solely for such person's own account, any commodity for future
delivery on or subject to the rules of any contract market.''
Section 1a(9) of the Act
any contract market.'' Section 1a(8) of the Act.
\41\ ``Floor Trader'' means ``any person who, in or surrounding
any pit, ring, post, or other place provided by a contract market
for the meeting of persons similarly engaged, purchases, or sells
solely for such person's own account, any commodity for future
delivery on or subject to the rules of any contract market.''
Section 1a(9) of the Act.
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The Commission requests comments specifically addressed to whether
these ``authorized customers'' eligibility requirements are appropriate
and whether net asset, net worth or other financial criteria should be
increased or decreased.
The Commission's proposed eligibility requirements for ``authorized
customers'' apply equally regardless of whether the foreign executing
broker directly receiving the order carries the FCM's customer omnibus
account, or gives up the trade for clearing to either the foreign
broker carrying the FCM's omnibus account or directly to the FCM. The
Commission believes that, in order to simplify the operational aspects
of complying with and enforcing the rule, one uniform standard should
define ``authorized customers.'' For example, if the minimum financial
requirements for authorized customers differed depending on whether
there was a give-up trade, then a customer might be permitted to
utilize direct foreign order transmittal for orders placed only in
those jurisdictions where the FCM maintains an omnibus account. Thus,
the U.S. FCM would have to create and maintain separate lists of those
investors qualified to place orders on each exchange, and implement
internal procedures necessary to monitor and apply the bifurcated rule.
Similarly, a rule requiring different standards for those firms
executing orders placed directly in an FCM's customer omnibus account
and those firms executing orders pursuant to a give up arrangement
would unnecessarily prejudice U.S
rate lists of those
investors qualified to place orders on each exchange, and implement
internal procedures necessary to monitor and apply the bifurcated rule.
Similarly, a rule requiring different standards for those firms
executing orders placed directly in an FCM's customer omnibus account
and those firms executing orders pursuant to a give up arrangement
would unnecessarily prejudice U.S. FCMs that do not maintain numerous
customer omnibus accounts abroad. Accordingly, the Commission proposes
a single standard to identify which ``authorized customers'' can
participate in direct foreign order transmittal.
(2) U.S. FCM Carrying Brokers
The Commission also proposes to limit direct foreign order
transmittal to authorized customers of FCMs whose adjusted net capital
exceeds minimum requirements. In a typical FCM-customer relationship,
the FCM limits the size of any one customer's open positions based upon
the customer's financial condition and creditworthiness. These trading
limits are generally correlated to the amount of assets available to
the customer to satisfy its contractual obligations, and serve to
protect the FCM (and derivatively, other market participants) in the
event that a customer's aggregate position declines significantly.
Should the customer place an order directly with an FCM that exceeds
the customer's trading limits, the FCM may reject the order. If the FCM
does not reject the order, and the customer cannot deposit additional
funds to cover any subsequent loss, then the FCM will have to use its
own capital to satisfy the margin call from a clearinghouse or clearing
broker or it will be in default.
Under the proposed rule, an FCM may not be able to prevent an
authorized customer from placing orders in excess of its trading limits
with an unaffiliated
not reject the order, and the customer cannot deposit additional
funds to cover any subsequent loss, then the FCM will have to use its
own capital to satisfy the margin call from a clearinghouse or clearing
broker or it will be in default.
Under the proposed rule, an FCM may not be able to prevent an
authorized customer from placing orders in excess of its trading limits
with an unaffiliated
FFOB.\42\ More specifically, an authorized customer may place trades
with an FFOB in multiple international markets without the immediate
knowledge of the FCM. Under these circumstances, an FCM may be
responsible for the trades even though the positions exceed a
customer's trading limits. Therefore, FCMs should possess sufficient
capital to meet an unusually large margin call and thus mitigate
against the increased systemic risk.\43\ Accordingly, the Commission
proposes to require FCMs whose authorized customers use direct foreign
order transmittal to possess either $50,000,000 in adjusted net capital
as defined by Rule 1.17(c)(5) \44\, or three times the amount of
adjusted net capital required by Rule 1.17(a)(1)(i)(B).\45\ The FCM's
compliance with this requirement will be determined by reference to the
most current Form 1-FR filed (or required to have been filed) by the
FCM with the Commission. With either amount of capital in reserve, the
FCM would more likely be able to satisfy the obligations of its
authorized customers without implicating the integrity of the market as
a whole or impacting other customers
The FCM's
compliance with this requirement will be determined by reference to the
most current Form 1-FR filed (or required to have been filed) by the
FCM with the Commission. With either amount of capital in reserve, the
FCM would more likely be able to satisfy the obligations of its
authorized customers without implicating the integrity of the market as
a whole or impacting other customers. In addition, the alternative
minimum capital requirement will allow smaller FCMs to participate in
the direct foreign order transmittal process, provided that they
maintain a proportionate amount of excess capital to mitigate the risk
associated with the activities of their authorized customers.\46\
Should an FCM fail to satisfy both of the minimum financial requirement
alternatives outlined above, it may seek relief from this requirement
by petitioning the Division for a no-action position accordance with
Rule 140.99.
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\42\ Financial obligations arising from a customer trading in
excess of its limits are resolved according to privately-negotiated
contractual arrangements entered into by the customer, the FCM and/
or the intermediating FFOBs, and/or the laws, rules and regulations
of the exchange governing such a transaction.
\43\ While some of these risks are present in domestic give-up
arrangements, they are mitigated by the fact that on U.S. exchanges
all participants to the transaction, including the floor brokers and
traders, are either clearing members of that exchange or guaranteed
by clearing members. Not all foreign exchanges have similar
requirements.
\44\ Commission Rule 1.17(c)(5).
\45\ Commission Rule 1.17(a)(1)(i)(B)
these risks are present in domestic give-up
arrangements, they are mitigated by the fact that on U.S. exchanges
all participants to the transaction, including the floor brokers and
traders, are either clearing members of that exchange or guaranteed
by clearing members. Not all foreign exchanges have similar
requirements.
\44\ Commission Rule 1.17(c)(5).
\45\ Commission Rule 1.17(a)(1)(i)(B). Rule 1.17(a)(1)(i)
requires FCMs to maintain adjusted net capital equal to or in excess
of the greatest of various statutorily defined amounts, including:
(B) Four percent of the following amount: the customer funds
required to be segregated pursuant to the Act and the regulations in
this part and the foreign futures or foreign options secured amount,
less the market value of commodity options purchased by customers on
or subject to the rules of a contract market or a foreign board of
trade for which the full premiums have been paid: Provided, however,
That the deduction for each customer shall be limited to the amount
of customer funds in such customer's account(s) and foreign futures
and foreign options secured accounts.
\46\ The Commission notes that as of March 31, 1999, 41 out of
the 200 firms currently registered as FCMs would not satisfy the
threshold financial requirements. Of those 41, only 14 (or 7% of the
total number of FCMs) carry accounts on behalf of foreign futures
and options customers.
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foreign options secured accounts.
\46\ The Commission notes that as of March 31, 1999, 41 out of
the 200 firms currently registered as FCMs would not satisfy the
threshold financial requirements. Of those 41, only 14 (or 7% of the
total number of FCMs) carry accounts on behalf of foreign futures
and options customers.
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The Commission requests comments specifically addressed to whether
these thresholds are appropriate in light of the increased systemic
risk associated with direct foreign order transmittal and whether other
financial criteria should be applied to determine the eligibility of a
U.S. FCM to participate in the process.
The FCM is responsible, along with the unregistered FFOB, for
determining which of the FCM's customers qualify as authorized
customers and for ensuring that the FCM maintains excess capital as
required by the rule. An FCM's breach of either of these core
obligations shall be considered a violation of the proposed rule. In
addition, the proposed rule requires each participating FCM to also
establish, or continue to maintain, reasonable procedures to facilitate
compliance with the other obligations imposed by the proposed rule
regarding its ability to supervise adequately the impact of such orders
on its financial condition, confirm and supervise foreign futures and
options orders placed through its customers omnibus account, and
maintain an audit trail to track an order from the time it is placed in
the customer omnibus account to the time it is cleared and reported
back to the foreign futures and options customer. An FCM's breach of
any of these obligations shall be considered a violation of the
proposed rule. Note that nothing in the proposed rule discharges an FCM
of its duty to comply with the requirements set forth in the Act,
including, but not limited to, its obligation to maintain the secured
amount set forth in Rule 30.7.
s cleared and reported
back to the foreign futures and options customer. An FCM's breach of
any of these obligations shall be considered a violation of the
proposed rule. Note that nothing in the proposed rule discharges an FCM
of its duty to comply with the requirements set forth in the Act,
including, but not limited to, its obligation to maintain the secured
amount set forth in Rule 30.7.
(3) Foreign Futures and Options Brokers
The Commission also proposes to specify which FFOBs may receive
foreign futures and options orders via direct foreign order transmittal
from U.S. customers without being required to register or obtain Rule
30.10 relief. Absent registration with the Commission, the Commission
believes that FFOBs should be, at a minimum, registered, licensed or
otherwise subject to regulation in the jurisdiction in which they are
located. While the Commission recognizes that such registration,
licensing or other regulation may offer different or even diminished
protection to U.S. investors (and carrying brokers), authorized
customers and qualified FCMs will know that the unregistered FFOB is
subject to the jurisdiction of a foreign regulatory authority. In
addition, the Commission believes that an FFOB's decision to register
abroad evidences its intent to act according to the governing statutes.
Accordingly, the Commission proposes that FFOBs not registered with the
Commission that accept orders pursuant to the guidelines of proposed
Rule 30.12 be licensed, authorized or otherwise subject to regulation
in accordance with the relevant laws, rules or regulations of the
foreign jurisdiction in which they are located
abroad evidences its intent to act according to the governing statutes.
Accordingly, the Commission proposes that FFOBs not registered with the
Commission that accept orders pursuant to the guidelines of proposed
Rule 30.12 be licensed, authorized or otherwise subject to regulation
in accordance with the relevant laws, rules or regulations of the
foreign jurisdiction in which they are located.
The Commission also proposes to require unregistered FFOBs seeking
to accept orders via direct order transmittal to demonstrate an ability
to mitigate against the effect of default on the exchange on which the
order is placed in the event that the FCM carrying the authorized
customer's account rejects a trade or is unable to meet a margin call
generated by one of its customers' trades. As one alternative, the
Commission proposes to require that an unregistered FFOB that accepts
orders from authorized persons in accordance with Rule 30.12 be a
clearing member (or a majority-owned affiliate thereof) on the exchange
on which the trade is executed. Although minimum capital requirements
for FFOBs vary from jurisdiction to jurisdiction, in general, clearing
members must maintain greater capital. In the event that the FCM
carrying the authorized customer's account rejects a trade or is unable
to meet a margin call generated by one of its customers' trades, the
clearing member, or derivatively, its majority-owned affiliate, would
be able to prevent a series of potential defaults by other
intermediaries and/or counterparties by absorbing the loss. As a second
alternative, the Commission proposes to allow those unregistered FFOBs
affiliated with FCMs to accept orders from authorized persons in
accordance with proposed Rule 30.12
ustomers' trades, the
clearing member, or derivatively, its majority-owned affiliate, would
be able to prevent a series of potential defaults by other
intermediaries and/or counterparties by absorbing the loss. As a second
alternative, the Commission proposes to allow those unregistered FFOBs
affiliated with FCMs to accept orders from authorized persons in
accordance with proposed Rule 30.12. As described in the existing
advisories, the Commission believes that an FCM and its affiliates have
a relationship that fosters the ability to exchange information as
necessary to prevent an authorized customer from exceeding its trading
limits without authorization and thereby putting the affiliate and the
FCM at risk. Accordingly, the Commission proposes that unregistered
FFOBs operating pursuant to proposed Rule 30.12 be clearing members on
the exchange on which the order is executed, a majority-owned affiliate
of a clearing member located in the
jurisdiction in which the trade is executed or be an affiliate of the
U.S. FCM that carries the authorized customer's account.
The Commission request comments specifically addressed to whether
these requirements for unregistered FFOBs are appropriate in light of
the increased risk associated with direct foreign order transmittal.
B. Procedural Safeguards
In addition to limiting direct order transmittal to a select class
of investors, carrying brokers, and FFOBs, the Commission proposes to
require carrying brokers to perform certain tasks designed to apprise
authorized customers of the risks of dealing directly with a foreign
broker and to mitigate against the risks of customer default. Under
both FIA's proposal and the Commission's proposed rule, the U.S. FCM
carrying the account of an authorized customer will be required to
furnish an additional risk disclosure document to authorized customers
advising them of the risks of placing orders directly with an
unregistered foreign broker before the authorized customer contacts any
FFOB
ate against the risks of customer default. Under
both FIA's proposal and the Commission's proposed rule, the U.S. FCM
carrying the account of an authorized customer will be required to
furnish an additional risk disclosure document to authorized customers
advising them of the risks of placing orders directly with an
unregistered foreign broker before the authorized customer contacts any
FFOB. While the Commission is sensitive to the costs imposed upon
carrying brokers by an additional disclosure requirement, it believes
the additional disclosure is necessary in light of the risks associated
with direct foreign order transmittal. In addition, the U.S. FCM will
be required to establish guidelines for direct contacts between any of
its authorized customers and any FFOB exempt from registration under
the proposed rule, and devise appropriate risk management procedures to
monitor its own risk relative to its authorized customers' risk
aggregated across all markets. The Commission believes that these
requirements will serve to further mitigate the increased systemic risk
associated with direct foreign order transmittal by promoting the flow
of relevant information among the parties to the transaction.
This proposed rule will apply to transmittal of orders to an FFOB
by telephone, facsimile and electronic mail messages. The rule shall
not address the transmission of orders via a screen-based direct
trading system or automated order routing system for execution on an
electronic foreign exchange. The relief under the proposed rule also is
not available to any FFOB that directly carries the customer account
for any foreign futures or options customers,\47\ unless the FFOB has
applied for and received confirmation of Rule 30.10 relief in
accordance with existing procedures \48\ or is registered with the
Commission as an FCM.
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der the proposed rule also is
not available to any FFOB that directly carries the customer account
for any foreign futures or options customers,\47\ unless the FFOB has
applied for and received confirmation of Rule 30.10 relief in
accordance with existing procedures \48\ or is registered with the
Commission as an FCM.
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\47\ The relief described herein will extend to those FFOBs that
accept orders directly from an authorized customer of a U.S. FCM
that maintains a customer omnibus account with a single foreign
affiliate who, in turn, maintains customer omnibus accounts with
FFOBs on various foreign exchanges, provided that the U.S. FCM
independently satisfies the minimum capital requirements prescribed
by the proposed rule, and the U.S. FCM, its foreign affiliate and
the FFOB otherwise comply with the conditions outlined therein.
\48\ Unlike an unregistered FFOB, a Rule 30.10 firm must, among
other things, consent to jurisdiction in the United States, agree to
provide access to its original books and records, represent that no
principal of the firm would be disqualified under Section 8a(2) of
the Act from registering to do business in the U.S. and consent to
NFA arbitration. Information regarding the registration status of
any FFOB, including those firms with exemptions from registration
pursuant to Rules 30.5 and 30.10, is publicly available through NFA.
Interested parties may contact NFA or access NFA's registration
database, BASIC, at http://www.nfa.futures.org.
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ent to
NFA arbitration. Information regarding the registration status of
any FFOB, including those firms with exemptions from registration
pursuant to Rules 30.5 and 30.10, is publicly available through NFA.
Interested parties may contact NFA or access NFA's registration
database, BASIC, at http://www.nfa.futures.org.
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Note that this proposed rule would replace prior Commission
advisories as the sole source of authorization for those unregistered
FFOBs that directly accept orders from foreign futures and options
customers.\49\ In addition, note that the proposed rule does not alter
any obligation to comply with other provisions of the Act, or any
existing regulatory obligations to the Securities and Exchange
Commission or state securities administrators. The Commission seeks
comments on this proposed rule at that time and invites comment
regarding any other amendments to Part 30 that may be appropriate in
light of these proposed rules.
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\49\ The following advisories will be rescinded if the proposed
rules are adopted: CFTC Advisory No. 93-115 (permitting unregistered
foreign affiliates of a U.S. FCM that carry the customer omnibus
account of the FCM to receive orders for trades placed directly by
certain foreign futures and options customers for execution for or
on behalf of such customers through the FCM's customers omnibus
account, provided that the affiliate had obtained confirmation of
Rule 30.10 relief) and CFTC Advisory No. 95-08 (extending the relief
in Advisory No. 93-115 to unregistered foreign affiliates who had
not received confirmation of Rule 30.10 relief). The Commission
seeks comments from any party adversely affected by the
determination to rescind CFTC Advisories Nos. 93-115 and 95-08.
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III. Related Matters
A. Regulatory Flexibility Act
ending the relief
in Advisory No. 93-115 to unregistered foreign affiliates who had
not received confirmation of Rule 30.10 relief). The Commission
seeks comments from any party adversely affected by the
determination to rescind CFTC Advisories Nos. 93-115 and 95-08.
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III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611,
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The Commission has previously
established certain definitions of ``small entities'' to be used by the
Commission in evaluating the impact of its rules on such entities in
accordance with the RFA.\50\ The Commission previously has determined
that registered FCMs and CPOs are not small entities for the purpose of
the RFA.\51\ With respect to CTAs, the Commission has stated that it
would evaluate within the context of a particular rule proposal whether
all or some affected CTAs would be considered to be small entities and,
if so, the economic impact on them of any rule.\52\ Due to the minimum
capital requirements for CTAs under proposed Rule 30.12, the Commission
believes that it is unlikely that firms defined as small businesses
could qualify as an authorized customer for the purpose of engaging in
direct order transmittal. Further, the proposed rule would not add any
legal, accounting, consulting or expert costs because the determination
of whether a business qualifies as an authorized person requires
minimal analysis of data that will be readily accessible. Therefore,
the Chairman, on behalf of the Commission, hereby certifies, pursuant
to 5 U.S.C. 605(b), that these proposed regulations will not have a
significant economic impact on a substantial number of small entities.
Nonetheless, the Commission specifically requests comment on the impact
these proposed rules may have on small entities
nimal analysis of data that will be readily accessible. Therefore,
the Chairman, on behalf of the Commission, hereby certifies, pursuant
to 5 U.S.C. 605(b), that these proposed regulations will not have a
significant economic impact on a substantial number of small entities.
Nonetheless, the Commission specifically requests comment on the impact
these proposed rules may have on small entities.
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\50\ 47 FR 18618-18621 (April 30, 1982).
\51\ 47 FR 18619-18620.
\52\ 47 FR 18618-18620.
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.
(Supp. I 1995)) imposes certain requirements on federal agencies
(including the Commission) in connection with their conducting or
sponsoring any collection of information as defined by the PRA.
While the proposed rule discussed herein has no burden, the group
of rules (3038-0023, Rules, Regulations and Forms for Domestic and
Foreign Futures and Options Related to Registration with the
Commission) of which it is a part has the following burden:
Average Burden Hours Per Response: 18.11.
Number of Respondents: 76,750.
Frequency of Response: Annually and On Occasion.
The Office of Management and Budget (OMB) approved the collection
of information associated with this group of rules on May 26, 1999.
Copies of the OMB-approved information collection submission are
available from the CFTC Clearance Officer, 1155 21st Street, NW,
Washington, DC, 20581 (202) 418-5160.
List of Subjects in 17 CFR Part 30
Definitions, Foreign futures, Consumer protection, Foreign options,
Registration requirements.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, sections
2(a)(1), 4(b), 4c and 8a thereof, 7 U.S.C. 2, 6(b), 6c and 12a (1982),
and pursuant to the authority contained in 5 U.S.C. 552 and 552b
Subjects in 17 CFR Part 30
Definitions, Foreign futures, Consumer protection, Foreign options,
Registration requirements.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, sections
2(a)(1), 4(b), 4c and 8a thereof, 7 U.S.C. 2, 6(b), 6c and 12a (1982),
and pursuant to the authority contained in 5 U.S.C. 552 and 552b
(1982), the Commission hereby proposes to amend Chapter I of Title 17
of the Code of Federal Regulations as follows:
PART 30--FOREIGN FUTURES AND OPTIONS TRANSACTIONS
1. The authority citation for part 30 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6, 6c and 12a, unless otherwise
noted.
2. Section 30.12 is proposed to be added to read to follows:
Sec. 30.12 Direct foreign order transmittal.
(a) Authorized customers defined. For the purposes of this section
an ``authorized customer'' of a futures commission merchant shall mean
any foreign futures or foreign options customer, as defined in
paragraph (c) of Sec. 30.1 of this chapter, that:
(1) The futures commission merchant has authorized to place orders
for the account of the futures commission merchant's foreign futures
and foreign options customer omnibus account and
(2) Is:
(i) A bank or trust company acting on its own behalf;
(ii) A savings association or credit union;
(iii) An insurance company;
(iv) An investment company subject to regulation under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); provided,
that such investment company is not formed solely for the specific
purpose of constituting an authorized customer;
ibus account and
(2) Is:
(i) A bank or trust company acting on its own behalf;
(ii) A savings association or credit union;
(iii) An insurance company;
(iv) An investment company subject to regulation under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); provided,
that such investment company is not formed solely for the specific
purpose of constituting an authorized customer;
(v) A commodity pool operator subject to regulation under the Act,
provided, that such commodity pool operator has funds, securities or
property exceeding $50,000,000 under management for the purpose of
trading in any commodity for future delivery or commodity option on or
subject to any contract market or foreign board of trade, irrespective
of whether the owner of the funds, securities or property under
management independently satisfies any of the requirements set forth in
paragraph (a) of this section;
(vi) A corporation, partnership, proprietorship, organization,
trust, or other entity not formed solely for the specific purpose of
constituting an authorized customer:
(A) Which has total assets exceeding $10,000,000, or
(B) The obligation which under the customer agreement with the
futures commission merchant are guaranteed or otherwise supported by a
letter of credit or keepwell, support, or other agreement by any such
entity referenced in paragraph (a)(2)(vi)(A) of this section or by an
entity referred to in paragraph (a)(2) (i), (ii), (iii), (iv), (v),
(vi) or (vii) of this section;
(vii) Any United States governmental entity, or political
subdivision thereof, of any multinational or supranational entity or
any instrumentality, agency, or department of any of the foregoing;
or other agreement by any such
entity referenced in paragraph (a)(2)(vi)(A) of this section or by an
entity referred to in paragraph (a)(2) (i), (ii), (iii), (iv), (v),
(vi) or (vii) of this section;
(vii) Any United States governmental entity, or political
subdivision thereof, of any multinational or supranational entity or
any instrumentality, agency, or department of any of the foregoing;
(viii) a broker-dealer subject to regulation under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et seq.), acting on its own behalf,
provided, however, that if such broker-dealer is a natural person or
sole proprietorship, the broker-dealer must also meet the requirements
of paragraph (a)(2)(vi) of this section;
(ix) A futures commission merchant subject to regulation under the
Act acting on its own behalf, provided, however, if such futures
commission merchant is a natural person or sole proprietorship, the
futures commission merchant must also meet the requirements of
paragraph (a)(2)(vi) of this section;
(x) A commodity trading advisor subject to regulation under the
Act, including any investment adviser registered as such with the
Securities and Exchange Commission that is exempt from regulation as
such under the Act or Commission regulations, with total assets under
management exceeding $50,000,000, irrespective of whether the owner of
the assets under management independently satisfies any of the
requirements set forth in paragraph (a) of this section.
Act, including any investment adviser registered as such with the
Securities and Exchange Commission that is exempt from regulation as
such under the Act or Commission regulations, with total assets under
management exceeding $50,000,000, irrespective of whether the owner of
the assets under management independently satisfies any of the
requirements set forth in paragraph (a) of this section.
(b) Procedures for futures commission merchants. It shall be
unlawful for any futures commission merchant to permit an authorized
customer to place orders for execution in the futures commission
merchant's foreign futures and foreign options customer omnibus account
directly with a person exempt from registration under paragraphs (c)
and (d) of this section, unless, such futures commission merchant:
(1) Meets one of the following capital requirements, as determined
by the FCM's most recent required filing of a Form 1-FR with the
Commission:
(i) Possesses $50,000,000 in adjusted net capital, as defined by
Rule 1.17(c)(5); or
(ii) Possesses three times the amount of adjusted net capital
required by Rule 1.17(a)(1)(i)(B); and
(2) Has established control procedures that will serve as
guidelines for permitting direct contacts between any authorized
customer of the futures commission merchant and any person exempt from
registration under paragraph (c) or (d), and has in place appropriate
risk management procedures to monitor its own risk relative to its
authorized customers' risk aggregated across all markets, including,
but not limited to, procedures to ensure that each authorized customer
satisfies the participation criteria set forth in paragraph (a) of this
section and to specify the manner in which trades may be executed
through its customer omnibus account pursuant to this section;
ent procedures to monitor its own risk relative to its
authorized customers' risk aggregated across all markets, including,
but not limited to, procedures to ensure that each authorized customer
satisfies the participation criteria set forth in paragraph (a) of this
section and to specify the manner in which trades may be executed
through its customer omnibus account pursuant to this section;
(3)(i) Furnishes a written disclosure statement to each such
authorized customer, in a form acceptable to the Commission, advising
the customer of the additional risks the customer may be assuming in
placing orders directly with the foreign broker.
(ii) The disclosure statement must read as follows:
Direct Order Transmittal Client Disclosure Statement
This statement applies to the ability of authorized customers
\1\ of [US FCM] to place orders for foreign futures and options
transactions directly with non-US entities (each, an ``Executing
Firm'') that execute transactions on behalf of [FCM's] customer
omnibus accounts.
Please be aware of the following should you be permitted to
place the type of orders specified above.
The orders you place with an Executing Firm are for
[FCM's] customer omnibus account maintained with a foreign clearing
firm. Consequently, [FCM] may limit or otherwise condition the
orders you place with the Executing Firm.
You should be aware of the relationship of the
Executing Firm and [FCM]. [FCM] may not be responsible for the acts,
omissions, or errors of the Executing Firm, or its representatives,
with which you place your orders. In addition, the Executing Firm
may not be affiliated with [FCM]. If you choose to place orders
directly with an Executing Firm, you may be doing so at your own
risk.
It is your responsibility to inquire about the
applicable laws and regulations that govern the foreign exchanges on
which transactions will be executed on your behalf
, or its representatives,
with which you place your orders. In addition, the Executing Firm
may not be affiliated with [FCM]. If you choose to place orders
directly with an Executing Firm, you may be doing so at your own
risk.
It is your responsibility to inquire about the
applicable laws and regulations that govern the foreign exchanges on
which transactions will be executed on your behalf. Any orders
placed by you for execution on that exchange will be subject to such
rules and regulations, its customs and usages, as well as any local
laws that may govern transactions on that exchange. These laws,
rules, regulations, customs and usages may offer different or
diminished protection from those that govern transactions on US
exchanges. In particular, funds received from customers to margin
foreign futures
transactions may not be provided the same protections as funds
received to margin futures transactions on domestic exchanges.
Before you trade, you should familiarize yourself with the foreign
rules which will apply to your particular transaction. United States
regulatory authorities may be unable to compel the enforcement of
the rules of regulatory authorities or markets in non-US
jurisdictions where transactions may be effected.
It is your responsibility to determine whether the
Executing Firm has consented to the jurisdiction of the courts in
the United States. In general, neither the Executing Firm nor any
individuals associated with the Executing Firm will be registered in
any capacity with the Commodity Futures Trading Commission.
Similarly, your contacts with the Executing Firm may not be
sufficient to subject the Executing Firm to the jurisdiction of
courts in the United States in the absence of the Executing Firm's
consent
the United States. In general, neither the Executing Firm nor any
individuals associated with the Executing Firm will be registered in
any capacity with the Commodity Futures Trading Commission.
Similarly, your contacts with the Executing Firm may not be
sufficient to subject the Executing Firm to the jurisdiction of
courts in the United States in the absence of the Executing Firm's
consent. Accordingly, neither the courts of the United States nor
the Commission's reparations program will be available as a forum
for resolution of any disagreements you may have with the Executing
Firm, and your recourse may be limited to actions outside the United
States.
Unless you object within five (5) days by giving notice
as provided in your customer agreement after receipt of this
disclosure, [FCM] will assume your consent to the aforementioned
conditions.
1 You should contact your account executive regarding
your eligibility to participate in the direct order transmittal
process.
(c) Exemption for foreign futures and options brokers. Any person
not located in the United States, its territories or possessions, who
is otherwise required in accordance with this part to be registered
with the Commission as a futures commission merchant or as an
introducing broker will be exempt from such registration, provided,
that such person accepts orders for foreign futures and foreign options
transactions from authorized customer via telephone, facsimile or
electronic message for the execution of the trades for or on behalf of
the customer omnibus account of a registered futures commission
merchant that meets the requirements of paragraph (b)(1) of this
section carried by the person, but does not solicit, or accept any
money, securities or property (or extend credit in lieu thereof)
directly, from any U.S
ed customer via telephone, facsimile or
electronic message for the execution of the trades for or on behalf of
the customer omnibus account of a registered futures commission
merchant that meets the requirements of paragraph (b)(1) of this
section carried by the person, but does not solicit, or accept any
money, securities or property (or extend credit in lieu thereof)
directly, from any U.S. foreign futures and options customer to margin,
guarantee to secure any trades or contracts that result or may result
therefrom; and provided further, that such person is licensed,
authorized or otherwise subject to regulation of the foreign
jurisdiction in which such person is located, and is either a clearing
member of a foreign exchange on which the trade is executed, a
majority-owned affiliate of a clearing member located in the
jurisdiction in which the trade is executed or an affiliate of the
futures commission merchant referred to in this section.
(d) Exemption for foreign futures and options brokers carrying a
customer omnibus account. Any person not located in the United States,
its territories or possessions, who is otherwise required in accordance
with this part to be registered with the Commission as a futures
commission merchant will exempt from such registration, provided, that
such person carries the customer omnibus account of a futures
commission merchant that meets the requirements of paragraph (b)(1) of
this section, and accepts orders for foreign futures and foreign
options transactions from authorized customers via telephone, facsimile
or electronic message for the execution of the trades for or on behalf
of the customer omnibus account of a registered futures commission
merchant either directly or pursuant to a give-up arrangement, and
provided further, that such person is licensed, authorized or otherwise
subject to regulation of the foreign jurisdiction in which such person
is located, and is either a clearing member of a foreign exchange on
which the trade is executed, a
for or on behalf
of the customer omnibus account of a registered futures commission
merchant either directly or pursuant to a give-up arrangement, and
provided further, that such person is licensed, authorized or otherwise
subject to regulation of the foreign jurisdiction in which such person
is located, and is either a clearing member of a foreign exchange on
which the trade is executed, a majority-owned affiliate of a clearing
member located in the jurisdiction in which the trade is executed or an
affiliate of the futures commission merchant referred to in this
section.
Dated: August 19, 1999.
By the Commission.
Catherine D. Dixon,
Assistant Secretary of the Commission.
[FR Doc. 99-22020 Filed 8-25-99; 8:45 am]
BILLING CODE 6351-01-M
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.